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Knowledge-Based Industries and Investment
Ron Goforth R.R. (Ron) Goforth, Ph.D.
President, Beta-Rubicon, Inc
Fayetteville, AR

“Knowledge-based industry,” along with “technology” and “technology-centric enterprises,” are buzzwords du jour in the economic development community.  Everybody supports these ideas, but often missing is the most tangible of commitments:  investments to support development and growth of enterprises.  The root of the missing support may be an incomplete understanding of the meaning of “knowledge-based.”  So, what is a knowledge-based industry?  Clear definitions are essential before proceeding to evaluate and make investments in this sector.

Interestingly, many companies tend to think of themselves as being “knowledge-based,” à la the dot-com piling-on.  But that thinking may or may not reflect reality.  According to a 1997 Business Intelligence Survey by Ernst & Young, managers of 87% of companies reporting, whatever their industry, believe their companies are a knowledge-based business.

This belief also shows up at the Arkansas Venture Forum (and likely many other state’s forums) where hopefuls from early-stage companies present business plans and investment opportunities.  A common description goes something like this:  “We are in a high-stakes business.  It's brains-based, and intellectual property is our primary asset.  Our start-up costs are high.”  These characterizations may be suggestive of “knowledge-based industry,” but clearly do not offer an adequate definition.

How did “knowledge-based” evolve in the first place?  It was, and still is, commonly used in certain computer-based systems related to artificial intelligence applications such as expert systems (ES) coupled with database technology.  People who first used the term were likely searching for an alternative to the much overused and somewhat dated “technology-based” label.

Using “knowledge-based” meaningfully requires an unambiguous and commonly understood definition.  Let’s start with:  “entities in which the creation and use of knowledge is the dominant activity, where the workers are largely degree-holding and have specialized R&D skills, and where intellectual property is the primary asset held.” 

To clarify further, “knowledge-based enterprises” display these characteristics:

  • Effective knowledge management - crucial to future business success.  The enterprise develops and uses relatively formal frameworks and models for knowledge management (usually a characteristic of larger leading-edge companies)
  • Executive positions such as CIO, CTO, or CKO (Chief Knowledge Officer), all requiring new enterprise essential resources, capabilities, and skills
  • An existing or developing “knowledge culture.”  If the enterprise in question is a larger company, a knowledge culture helps to overcome “knowledge hoarding,” a significant obstacle to sharing knowledge.  Technology may also be used to identify and implement solutions for effective knowledge development and sharing
  • Procedures and practices in place to protect corporate knowledge, especially technology-oriented intellectual property.

Realistically, “the action” now on the economic scene is with enterprises having these characteristics, and the action will increasingly be there.  We must prepare for the situation and make the investments.  Knowledge-based enterprises simply do not create large numbers of high-paying jobs for poorly educated workers.

These considerations lead directly to the hot-button issue of education and the definition of “investment in knowledge.”  Spending on education and skills development--clearly critical to the growth of a modern workforce--must account for the greatest part of the investment in knowledge.  So, here’s a starting point for defining “investment in knowledge:”  public and private spending on higher education, expenditures on research and development, and investment in computer-based and information systems, spending on education and skills development clearly critical to the growth of a modern workforce.

In Arkansas there are several encouraging signs of progress in promoting knowledge-based industry:  (1) the Arkansas Venture Forum and the attention given there to knowledge-based industries; (2) the implementation by the Arkansas Development Finance Authority (ADFA) of the “Fund of Funds” to promote investment to seed- and early-stage enterprises; (3) a recently enacted Arkansas law providing tax credits for job creation based on a company’s payroll rather than its average wage and income tax credits for R&D expenditures; and (4) the emergence of private-sector technology company incubators.

In preparing to achieve, the time is now to promote increased awareness of the critical role of knowledge-based enterprises on our future success.  To gain needed investments in knowledge, there must be broad public understanding that the success of knowledge-based industries is directly dependent on the quality of available education.  With a better understanding of the meaning and benefits of “knowledge-based enterprises,” early and patient investments in these enterprises can begin to set the stage for new economic growth. 

 

NOTE: Beta-Rubicon, Inc., a company self-described as “knowledge-based,” specializes in independent technology assessment and due diligence services for both the private and public sectors. 

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